Eurazeo

The global shipping industry, which is key to our globalized economy, is facing major challenges as it looks towards a cleaner and more sustainable future. Sylvain Makaya and Audrey Lambry argue that addressing these issues will require substantial investment, opening opportunities for innovative financing solutions.

Investing for a cleaner, more sustainable shipping industry

The huge cargo ships plying the oceans are crucial to maintaining a globalized economy, with maritime trade delivering approximately 90% of the world’s traded goods. After bouncing back from the impact of the Covid shutdown in 2020, cargo shipments today are estimated at over 11 billion tons a year and predicted to triple in volume by 2050.

Such a sustained pace of future growth will require significant levels of investment for the shipping industry as it confronts a number of urgent challenges.

Cutting down emissions

One of the most pressing issues the industry faces is ships’ emissions, currently estimated to account for 2.8% of all greenhouse gases. The International Maritime Organization has already set an ambitious target of reducing that amount by 50% by 2050, and the EU is expected to follow that with even more ambitious goals soon.

It will require some creative thinking to determine where industry turns to for its future energy sources, with a wide range of possible options such as methanol, ammonia, hydrogen, biofuels, electricity and liquified natural gas. All alternatives to the fuel oil currently used will require heavy capital investment, not only in ships and their engines, but also in ports’ infrastructure, to provide bunkering facilities, charging stations, and other essential facilities.

The IMO took the first steps to clean up the industry in 2020 by imposing a tight 0.5% cap on the dangerous sulfur content of the heavy fuel oil that ships used until then and also by extending its designated “emission-control areas” which impose an even stricter 0.1% sulfur limit.

Retrofitting the old, developing the new

A third expensive issue that needs to be addressed by the shipping industry is the age of the world’s fleet. Ships today are typically scrapped earlier than they used to be. The average age of ships leaving service now is 25 years or less, well down from the average in 2007 of over 30 years. Today, one-fifth of the global fleet is already more than 20 years old, old in shipping terms, and therefore more expensive both to run and to insure. The costs of retrofitting a fleet to address the problems of GHG emissions and waste can be substantial, prompting shipowners to adopt a two-pronged approach: progressively replace their fleets with new generation, more sustainable vessels, and improve the performance of vessels of intermediate age through retrofit.

As banks withdraw, alternative financing will step in

The burden of financing these three challenges is compounded by the fact that the banking sector has significantly tightened its lending criteria to the maritime industry, and today allocates 25% less to shipping operators than it did 10 years ago.

This withdrawal of the banks from the sector is likely to continue in coming years, as the major financial institutions accelerate their de-leveraging to align with the requirements of the Basel IV standards.

At the same time, equity financing remains only a small part of the ship financing pool, thus opening the way for innovative alternative lenders to step in, providing the means for ship owners to comply with the new regulations, especially in the small- and mid-market sector, which represents around two-thirds or more of the global fleet.